Oil Is Still Above $100 And Treasury Yields Have Surged. Investors Still Aren’t Giving Up On Stocks.

Oil continues to be above $100 a barrel and U.S. Treasury yields have climbed to levels not seen since before the global financial crisis, but large investors are still maintaining substantial exposure to stocks as expectations for corporate earnings and artificial intelligence spending remain strong.

Brent crude futures were trading around $105.12 a barrel Wednesday after falling 3.3%, while West Texas Intermediate was around $101.72. Prices have remained elevated as the Iran war and disruptions to energy infrastructure and shipping routes in the Middle East and Europe continue to affect global supplies.

Bond markets have also come under pressure, with the benchmark 10-year U.S. Treasury yield crossing 5% Tuesday and reaching its highest level since 2007. The yield eased Wednesday but remained close to multi-decade highs.

Those pressures have made equity trading more volatile, but institutional investors have not shifted decisively away from stocks. A net 49% of fund managers remained overweight global equities in September, Bank of America's latest Global Fund Manager Survey found, leaving stocks as the most widely held overweight asset class.

The survey covered 170 investors overseeing a combined $470 billion and showed that some of the strong risk appetite seen during the summer had faded. Investors remained broadly positive on economic growth and corporate earnings, however, while allocations to bonds fell to their lowest level since May 2022, CNBC noted.

Expectations for corporate profits were particularly strong, with fund managers' expectations for double-digit earnings-per-share growth over the next 12 months reaching their highest level since August 2021. About 38% of respondents also said they expected a global economic "boom" over the coming year.

The positioning comes after a strong year for equities despite higher energy prices, rising borrowing costs and geopolitical tensions. U.S. stocks have also faced renewed volatility this week as investors weighed concerns about the pace of artificial intelligence development against continued spending on AI infrastructure.

Rising bond yields have increasingly emerged as a concern for professional investors. Bank of America's September survey found that a disorderly increase in bond yields had become the biggest perceived tail risk for markets, overtaking concerns about an AI bubble.

Still, large asset managers have maintained substantial equity exposure.

BlackRock Investment Institute said this week that higher global interest rates had raised the hurdle for investment returns but had not changed its broader pro-risk stance. The firm remains overweight U.S. equities and AI-related investments and has returned to an overweight position in emerging-market stocks.

BlackRock said the effect of higher yields on stocks depends partly on what is driving borrowing costs. When higher rates accompany stronger investment and economic growth, rising corporate earnings can help offset the increased cost of capital.

The firm also expects continued AI investment to support growth and corporate profits even as the buildout requires increasing amounts of capital, electricity and other resources. BlackRock pointed to semiconductors, memory chips, data centers and power infrastructure as areas where growing demand is creating supply constraints.

AI spending remains central to that outlook, but investors are also paying closer attention to whether the large sums being committed to data centers and related infrastructure ultimately translate into higher revenue and profits.

UBS Global Wealth Management has also maintained its focus on AI demand despite the recent market volatility. Mark Haefele, the firm's chief investment officer, said in a client note cited by CNBC that the key issue was whether demand for AI and companies' ability to generate revenue from the technology would continue to expand.

Haefele said UBS continued to favor a diversified approach across the AI supply chain, including semiconductors, networking, power, cloud infrastructure and larger software platforms positioned to benefit from increased adoption.

Higher Treasury yields nevertheless create a more difficult backdrop for equities because they raise borrowing costs across the economy and provide investors with more attractive alternatives to stocks. Elevated oil prices can also increase costs for companies and households while adding to inflation pressures.